The fine print says that many FFEL student loan borrowers are not eligible for Covid-19 Forbearance and a 0% interest rate. However, there is a way to convert FFEL loans to gain eligibility.
The federal interest and payment freeze only applies to student loans “held nationwide”. FFEL loans are federal student loans that are not held by the federal government. As a result, many borrowers are still charged interest. Fortunately, direct federal consolidation could fix this problem. Unfortunately, for some FFEL borrowers, direct federal consolidation can be a mistake.
Today we’re going to look at how federal loans qualify for the 0% interest rate. I’ll also explain why the interest rate hiatus might still be a mistake for some borrowers.
Conversion of FFEL student loans into federal direct loans
Federal Family Education Loan (FFEL) Program Student Loans are federal student loans. Usually, however, a third party owns the debt. Hence the distinction between federal and federal student loans.
Federal Direct Consolidation converts FFEL debt into Federal Direct debt. During the consolidation, the federal government will pay off the FFEL loans and the debt will be replaced with a new federal direct loan.
Before the student loan rates freeze, borrowers used this process to qualify for the public loan program. Nowadays, the same steps mean indulgence and 0% interest.
The direct consolidation process of the federal government
The federal government’s direct consolidation process is carried out exclusively by the Ministry of Education.
It’s pretty easy to use. The Department of Education estimates that most borrowers will complete the process in about 30 minutes.
Borrowers can expect the following basic steps:
- Completing the initial application. This is the part that takes half an hour.
- The Department of Education calculates and makes arrangements for the final repayment of the original loan. Borrowers do not need to take any action during this step.
- Funds from a new federal direct consolidation loan will be used to repay the old loan. This is the step that gets rid of the FFEL loan and creates a new federal loan.
- Borrowers begin repaying the new federal direct consolidation loan. As a government-held loan, borrowers qualify for coronavirus deferment and a 0% interest rate.
While this process sounds simple, it has significant consequences. Paying 0% interest by October is a big perk, but consolidating can be a big mistake. Borrowers should understand the ramifications of consolidation before starting the process.
The validity of direct consolidation to qualify for 0% interest
I usually don’t like injecting myself into these articles.
However, this is a topic that readers can view with a little skepticism. I know I would.
I can say that I personally borrowed FFEL loans when I was in law school. Long before the Covid 19 pandemic, these loans were consolidated into a direct federal consolidation loan. My credits qualify for the payment and the interest freeze.
The Ministry of Education stated the following about consolidation and 0% interest:
When is Federal Direct Consolidation a Failure?
Borrowers should understand that federal direct consolidation is not a tiny loophole to be exploited for 0% interest.
The consolidation eliminates old loans and creates a new loan. The consequences can be devastating to some borrowers.
In the worst case scenario, a borrower may be nearing qualification for student loan allocation due to an earnings-based repayment plan. With the consolidation, this borrower starts the forgiveness process at the beginning. In this case, a temporary interruption in interest rates would not justify wasting years of payments that would have counted towards forgiveness.
Borrowers need to weigh the benefits of the temporary relief against the progress that consolidation wipes out.
An even bigger increase in the stakes is the fact that there is no way to reverse a loan consolidation. Once the process is complete, there is no going back.
Some borrowers may also have amassed significant uncapitalized interest on their loans. The consolidation process is one of the ways federal interests are capitalized.
Borrowers on the fence should carefully discuss their options with their loan servicer. Reading the Sherpa Federal Consolidation Guide to Student Loans can prepare you for this conversation.